On Thursday the BoE will publish the MPC’s policy decision, the May Inflation Report and the minutes of the MPC meeting due to end on 9 May. We expect a majority of the nine-member MPC to vote in favor of maintaining the bank rate at 0.50%, with Ian McCafferty and Michael Saunders likely dissenting in favor of a 25 bp increase (in a repeat of the March vote).

Back in February, the MPC said policy would need to be “tightened somewhat earlier and by a somewhat greater degree” and, in March, the MPC said its forecasts were “broadly on track”. As a result, in March, we reluctantly changed our forecast to include a hike in May. Since then, the data have pointed to lower growth and inflation than the MPC expected, and the market-implied probability of a hike has fallen dramatically to just 10%, down from 90% on 10 April and 80% on 17 April.

Real GDP growth was just 0.1% qoq in the first quarter of 2018 according to the official preliminary estimate, 0.2 pp below the MPC’s forecast. While bad weather (the Beast from the East) explains part of the weakness, the BoE had already revised down its forecast to account for this, and the weather cannot fully explain the slowdown. Other disappointments included the sharp drop in the composite PMI in March and its limited rebound in April; subdued wage growth in January and February; the sharp decline in new-car registrations and consumer credit in March; weak retail sales, manufacturing and construction output; and consumer confidence having eased again. In March, headline CPI inflation fell by 0.2pp to 2.5% yoy, 0.3pp below the MPC’s projection. While some temporary factors were likely responsible, pipeline inflationary pressure is easing as the upward effect from past sterling depreciation fades. While employment remains strong and the unemployment rate is at a 42-year low, both tend to lag the economic cycle.

In its updated macro projections, the BoE will have to lower its near-term projections for growth and inflation, reflecting lower data outturns. The key question is how much of the recent weakness in growth will be judged as temporary. We expect that the MPC will not judge all of this as temporary and, since it is unlikely to change its estimate of supply (the MPC’s annual stock-take of supply was conducted in February), any remaining spare capacity will likely be used up at a slower rate, which is consistent with a more gradual hiking path.

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